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Harnessing Fully Limited Risk

Last week, I explained two of the factors that drive the success of my research and trading service, Cycle 9 Alert.

To recap, those are…

We win more often than we lose, and

Our winners are bigger than our losers.

Interestingly, it’s mathematically possible to make money with a strategy that has the opposite characteristics – one that loses more often than it wins, with average losses larger than average winners.

But that’s only in theory.

In reality, investor psychology comes into play. And I’ve learned over the years that it’s incredibly difficult to maintain discipline to a strategy that rarely wins and also exposes investors to large, often catastrophic losses.

Cycle 9 Alert is NOT that strategy.

Over the last five years, I’ve proven that my Cycle 9 Alert system is highly accurate – with a win-rate of 68%. And I’ve proven that it captures “big” winners, while keeping losses relatively smaller.

Today, I want to explain a third factor that explains our long-running success.

That is our unique ability to fully limit risk.

The absolute best thing about our option-BUYING strategyis that it completely limits the amount of money you can lose on any one position.

If your portfolio is fully invested in stocks, you could lose a full 100% of your entire portfolio (or more, if you’re buying on margin).

You CANNOT get that level of protection when you sell options (a commonly touted strategy that I hate). With option-selling strategies… your risk is completely UNLIMITED. You can lose everything in your account AND MORE. Seriously, your broker could call and demand that you send them more money than you have!

But with Cycle 9 Alert, we only BUY option contracts. Our risk on any given position is completely limited. It’s impossible to lose any more than the cost of the option contract, determined at the time of purchase.

And since I generally recommend not investing any more than 5% of your account in one option position, it’s nearly impossible to torpedo your portfolio, even when a few trades don’t go your way.

Taking losses is an unavoidable cost of doing business. Remember, even with a strong win-rate of 68%, about three out of every 10 Cycle 9 Alert trades end up turning sour on us. And some of them have resulted, and will result, in full individual position losses.

But that’s perfectly fine. Our strategy is fully designed to absorb those losses. Because while our potential losses on any given trade are fully capped at 100%… the potential profits we can earn on any given trade are unlimited!

That’s the power of the asymmetry of risk and return!

Our risk is completely limited to one-times our original investment. But on the other hand, our return potential is unlimited, often generating profits two-times, three-times or four-times the size of the original investment.

Since we launched Cycle 9 Alert, in 2012, subscribers have captured a number of these 100%-plus winners.

We’ve grabbed profits of 336% on Pan American Silver Corp.… 316% on a volatility ETF… 201% on U.S. Steel… 197% on Rockwell Automation… 191% on Royal Dutch Shell… 140% on Titan Machinery… and 125% on Merck & Co., just to name a few.

All told, the success of Cycle 9 Alert over the last five years comes down to the asymmetry of risk and return. Essentially, we’re exposing ourselves to small (limited) risks and positioning ourselves for large (unlimited) returns.

This is the case because of three key truths…

We win more often than we lose,

Our winners are bigger than our losers, and

We can never lose more than 100% on a trade when it sours… but we can rake in 100%… 200%… even 300%… when we lock in on a winner.

Combined, these three factors explain the long-running success that Cycle 9 Alert has had over the last five years, and show how it will continue to pull profits from any market well into the future.

Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.